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Daimler Stake Sale Underlines Mercedes, Sector Weakness

Investors Reckon This Could Be The First Of Many Equity Issues.
Is It Urgent Need For Capital, Or Result Of Long New Partner Search?
Wall Street Journal Wonders If Arab Interest Might Extend To Detroit.

Daimler’s decision to sell a 9.1 per cent equity stake to Abu Dhabi’s Aabar Investments shows its capital position was worse than anticipated, but also is likely to be the first of many desperate European vehicle manufacturers to tap markets for cash.

Aabar becomes Daimler’s biggest investor, ahead of Kuwait, which will see its holding diluted to 6.9 per cent from about 7.6 per cent.

According to Max Warburton, analyst with Bernstein Research, existing shareholders excluded from the capital increase won’t be happy to see their stakes diluted. The move shows how tough times are at Daimler.

“Daimler’s move suggests it needs capital more urgently than widely realised,” Warburton said.

Warburton said Daimler’s cash position is worse than German peers BMW and VW.

“Heading into this recession we speculated that Renault (of France, and Italy’s) Fiat were the auto companies most likely to issue equity, with (France’s) Peugeot-Citroen also a potential risk. Thanks to the generosity of the government, the French companies have avoided equity issuance, and Fiat has also yet to act,” Warburton said.

France has given Renault and Peugeot-Citroen cheap loans of €3 billion each.

First of many
Adam Jonas, analyst with Morgan Stanley, agreed that Daimler’s act will be the first of many.

“It’s a prudent move and we expect others to follow suit. We are not surprised by the capital increase and indeed expect similar moves from all European manufacturers unless the environment improves sharply and soon,” Jonas said.

Jonas expects Daimler to burn through more than €18 million of cash per day in 2009, and expects the Mercedes car division’s margins to reach a negative 10 per cent, or worse, in the current quarter, with the truck division four per cent or worse, in the red.

“We expect the (big) European manufacturers to burn €104 million a day in 2009, equating to nearly 60 per cent of the sector’s market cap over the course of the year,” he said.

Nomura International agrees the deal raises a cloud over the sector, after conceding that the sale to Aabar was the most affordable way for Daimler to raise cash.

“However the implications for the sector as a whole may be less positive, in our opinion. The risk of equity dilution is likely to return to the forefront of investors’ minds. Furthermore, premium makers with solid net financial positions in their industrial businesses may be more in need of additional funding than widely assumed,” said Nomura analyst Dorothee Hellmuth in a report.

Open to interpretation
Citigroup Global Markets analyst John Lawson said there were two ways to interpret Daimler’s move.

“Does it indicate an unexpectedly urgent need for capital, or the overdue fruition of along search for new ‘core’ shareholders to protect the company from its vulnerably high-free-float,” Lawson said.

Lawson didn’t answer his question.

Unlike family controlled firms like Peugeot and BMW which have enough shares to stop a hostile takeover, there are enough Daimler shares in public hands which could lead to a predator taking control, in theory at least.

UniCredit’s Georg Stuerzer saw nothing sinister in the deal, commenting that it will bolster Daimler’s net cash position to €5 billion, even in the case of a long economic crisis, and will allow the development of more fuel efficient cars, new technologies, or even the launch of restructuring programmes.

Ironic
Stuerzer saw some irony too.

“The fact that Daimler has spent several billion Euros on share buybacks and that the new number of shares will be almost at the same level as it was before involves a certain irony. But since these times are exceptional and require especially sound financials, we think that the lower risk profile outweighs the negative effect of the dilution,” Stuerzer said.

Bernstein Research’s Warburton believes Daimler needs to do more.

“We are growing more nervous about Daimler. Cash burn looks set to remain severe for at least the next 6 months. Management appears reluctant to acknowledge the extent of the company’s challenges (at least in public) and details on measures to contain cash burn and restructure the company for a weaker economy have been notably absent so far,” Warburton said.

The Wall Street Journal’s “Heard On The Street” column came up with a hard to believe bit of speculation. With Arab money now claiming over 16 per cent of Daimler, maybe they would be interested in helping out troubled automakers in the U.S.?

“With U.S. automakers begging President Barack Obama’s federal government for bailouts it may only be a matter of time before Arab money comes to Detroit’s rescue too,” said the Journal’s Andrew Critchlow.

Critchlow cited no evidence to back up his claim. This one should be filed in the folder called “In Your Dreams”.


Neil Winton – March 31, 2009

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